Why do covered call options increase in value when the stock connected to the call decreases? ?
I have a couple hundred shares of a couple different stocks in my portfolio that I've saved hard to obtain, a friend suggested selling covered calls against them, I researched it and started doing it. I'm noticing though that when the stock drops the contract increases. Why is that exactly? and could I just buy to close that contract, take the profit and sell another call on the same shares?
- zman492Lv 71 month ago
What you are describing is an unusual situation. Almost always, when the price of a stock drops the price of call options on the stock also drop.
One possible reason is that the stock price dropped because the stock went ex-dividend, but the amount the stock price decreased was less than the dividend amount. From an option trader's view that would be considered a increase in the stock price because the stock did not decrease as much as expected.
About the only other reason for the call option price to increase would be some kind or news release that increased the implied volatility of the underlying stock significantly.
I also recommend you double check the option premium quotes you looked at.
<<< could I just buy to close that contract, take the profit and sell another call on the same shares?>>>
You can definitely buy to close that contract, for either a profit or a loss, and sell another call on the same shares. That is generally known as "rolling" and option. Unless the options are quite liquid you are likely to be better off using a "spread order" to buy to close the old option and sell to open the new option in one order. Contact you brokerage to find out how to enter a spread order.
Covered calls are something I have seen a lot of people lose money with. They tend to think of covered calls as "free money" but you need to keep in mind that when you sell a covered call you are limiting your potential profits much more than you are reducing your potential losses. During a bull market you may end up selling a stock for a 7% profit instead of the 17% profit you could have had if you had not sold the covered call.